Mergers and acquisitions can be accretive in that they increase financial performance, or dilutive in the reverse case, where a measure such as earnings per share (EPS) actually falls. It is a fact that 70% of mergers and acquisitions actually destroy value.
In implementation, M&As typically face the following critical issues:
Incompatible corporate cultures: The cultures of the two companies may be inconsistent, resulting in resources being diverted away from the focal synergies.
Business as usual: The target company may allow redundant staff and overlapping operations to continue, thwarting efficiency.
High executive turnover: The target company may lose critical top management team leadership. A recent study reports that target companies lose 21% of their executives each year for at least ten years following an acquisition (twice the turnover experienced in nonmerged firms).
Neglect business at hand: A recent McKinsey study reported that too many companies focus on integration and cost cutting, and neglect the daily business at hand and customers.
Making It Happen
Despite the grim statistics, several companies are skilled M&A executors. For example, General Electric has integrated as many as 534 companies over a six-year period, and Kellogg’s delivered a 25% return to stockholders after purchasing Keebler.7 The following are key steps to facilitating a successful process before and after a merger:
Before the Merger
1. Begin by formulating a clear and convincing strategy. Strategists must first develop a compelling and sustainable strategy. Key questions include: What is your firm’s strategy? What role does the M&A play in this strategy? What is the vision of the strategy of the new entity?
2. Preassess the deal. Prior to signing a memo of understanding, managers should examine operational and management issues and risks. Seek answers to the following questions: Is this the right target? What is the compelling logic behind this deal? What is the value? How would we communicate this value to the board of directors and other key stakeholders? What will our strategy be for bidding and negotiations? How much are we willing to spend? If we are successful, how can we accelerate integration?
3. Do your due diligence. Executives must acquire and analyze as much information as possible about potential synergies. In addition to managers across key functional areas in the firm, outside experts can be brought in to help appraise answers in the preassessment, and especially to challenge assumptions, by asking questions such as:
Are our estimates of future growth and profitability rates reliable? Are there aspects of the company history/culture or of the environment (for example, legal, cultural, political, economic) that should be taken into account?
4. Devise a workable plan. Formulate plans that take into account some of the following: What is our new entity’s organizational structure? Who is in charge? What products will be taken forward? How will we manage company accounts? What IT systems will we use?
5. Communicate. M&A transactions tend to be viewed favorably when executives can convincingly discuss integration plans, both internally and externally. Managers should be prepared to answer the questions identified above, as well as: How can we prepare our people psychologically for the deal? What value will be created? What are the priorities for integration? What are the primary risks? How will progress be measured? How will we address any surprises?
After the Deal
6. Establish leadership. The new entity will require the quick identification and buy-in of managers, especially at top and middle levels. Ask: Who will lead the new entity? Do we have buy-in and support from the right people?
7. Manage the culture and respect the employees of the merged/acquired company. An atmosphere of respect and tolerance can aid the speed and ease of integration. Executives should formulate plans that address the following concerns: How can we encourage the best and brightest employees to stay on in the new entity? How can we build loyalty and buy-in?
8. Explore new growth opportunities. Long-run performance is linked to identifying and acting on both internal and external growth opportunities. Managers should seek out any untapped growth opportunities in the new entity.
9. Exploit early wins. To build momentum, the new entity should actively seek early wins and communicate these. To identify them, consider whether there early wins in sales, knowledge management, or the work environment.
10. Focus on the customer. To survive, firms must create value for customers. Managers must continue to ask: Are we at risk of losing customers? Are our salespeople informed about the new entity? Can our salespeople get our customers excited about the new entity?
1 Firstbrook, Caroline. “Transnational mergers and acquisitions: How to beat the odds of disaster.” Journal of Business Strategy 28:1 (2007): 53–56.
2 Quoted on ThinkExist.com: thinkexist.com/quotation/this_is_a_decisive_move_that_accelerates_our/346964.html
3 Smalley, Tim. “Microsoft withdraws from Yahoo! acquisition.” Bit-tech.net (May 5, 2008).
4 Bower, J. L. “Not all M&As are alike—and that matters.” Harvard Business Review 79:3 (2001): 92–101.
5 Biggar, J. M., and E. Selame. “Building brand assets.” Chief Executive 78 (1992): 36–39. Cited in Bahadir, S. Cem, Sundar G. Bharadwaj, and Rajendra K. Srivastava. “Financial value of brands in mergers and acquisitions: Is value in the eye of the beholder?” Journal of Marketing 72:6 (2008): 147–154.
6 Waller, David. Wheels on Fire: The Amazing Inside Story of the Daimler–Chrysler Merger. London: Hodder & Stoughton, 2001, p. 243.
7 Perry, Jeffrey S., and Thomas J. Herd. “Mergers and acquisitions: Reducing M&A risk through improved due diligence.” Strategy & Leadership 32:2 (2004): 12–19.
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